<p>Hanna, you’re exactly right. Biglaw firms don’t make as much money off of the work of their junior associates as one would think. As Hanna mentioned, there are recruiting costs and benefits, and there are also the costs of providing office space, heating and cooling that space, cleaning and maintaining that space, training junior associates (in formal settings, which often includes things both internal training and external training like membership to organizations that provide continuing legal education (CLE) such as Practicing Law Institute (PLI)), the costs of bar and bar association memberships, technology costs (blackberries, fax machines, laptop computers, etc.), administrative support (administrative assistants, word processing staff, duplicating and mailroom staff), library services, etc.</p>
<p>I never bought it, but when I was a junior associate (when junior associates made a lot less money than they do today), we were often told that our law firm actually lost money on us until our third year of practice. I’m not entirely sure how that calculus works out today.</p>
<p>sally, I’m not sure they actually lose much money but they certainly aren’t making huge profits from the work of those young associates. What large firms are banking on is having what they consider the ‘best’ candidates and developing them for the longterm, for all those years prior to a relative few of them being invited into the partnership. The pyramid structure of the large firms in the U.S. relies on large numbers of associates ‘supporting’ the much smaller number of partners at the top.</p>
<p>At least the firms are being completely up front now about hiring people who will never be anything but associates. I am seeing more and more ads from the large firms for “career associates.”</p>
<p>You’ve missed the key nuance. Star baseball players are paid highly because they have been proven time and time again to draw paying fans and generate revenue for their team. Whether people should be willing to pay as much as they do to watch star baseball players is a different topic entirely. The bottom line is that they do. Like it or not, star baseball players generate tremendous economic value and it is not surprising that they are paid accordingly.</p>
<p>But medical residents likewise generate tremendous economic value. Let’s be brutally honest - the United States has the most expensive health care system in the entire world. For-profit hospital and health-care organizations such as HCA and Tenet are highly profitable companies, and even nonprofit organizations such as Partners Healthcare generate billions in revenues. If you are hospitalized - even for the most picayune of reasons, you (or your insurance company) is going to be charged a hefty fee, even if almost all of your care was provided by residents. Medical residents therefore generate massive economic value for their employers.</p>
<p>But they don’t capture that value, and that’s the rub. Each medical resident provides care that results in medical bills that may total in the millions of dollars per year, while themselves being paid a pittance. Why such a gap? </p>
<p>A possible counterargument is that medical residents are still not fully trained and hence part of their compensation comes in the form of training. But that’s precisely the same argument that ought to apply to beginning biglaw associates. As sallyawp stated (and to which I emphatically agree), first year associates have few practical skills. That’s why I continue to ask the question - why are they paid so much? Specifically, does a first year biglaw associate really generate 4x more profit than does a medical resident? If not, then why are they being paid 4x more? </p>
<p>
</p>
<p>If it’s really true that law firms actually lose money on their associates until their third year of practice, then that makes the question all the more intriguing: exactly why do first and second year associates continue to be paid so much?. As mentioned before, why don’t law firms then simply cut their associate salaries in half, or even 2/3? Or, why do they even bother hiring young associates at all (if they truly are unprofitable) - when they could instead poach them from other firms after they’ve ‘trained’ for a few years? </p>
<p>As sallyawp said, law firm partners would surely like to pay the associates less, as that means greater profits for them. So why don’t they do just that? There is clearly some sort of socio-cultural dynamic within biglaw that ratchets associate pay so high. What exactly is that dynamic? </p>
<p>
</p>
<p>Which is surely distorted by the low-end. As I said before, there are plenty of low-end or even unaccredited law schools where the admissions requirements are trivial. Their graduates probably don’t make much, and may not even be able to find employment in the legal field at all. On the other hand, even the lowest-ranked medical school still has respectable admissions standards and its graduates will still become physicians - perhaps not with a desirable residency match - but physicians nonetheless. Like I’ve always said, it’s better to get into the worst medical school than the worst law school. </p>
<p>What I’m talking about is what happens to the top people in both professions. A guy who graduates from Harvard Law has an excellent chance at a high-paying biglaw associate position. But a guy who graduates from Harvard Medical, if he actually wants to practice medicine, has no choice but to endure years of a low-paid medical residency. That’s despite the fact that he actually has more debt (because of an extra year of schooling) than his HLS counterpart. Whose lifetime earnings are higher?</p>
<p>The cream of the crop students at the cream of the crop law schools can write their own tickets. These highly desirable candidates can find jobs utilizing their law degrees in other fields like investment banking, private equity or consulting, or they can work as lawyers for a year and then take off to take jobs with clients or others. Like it or not, the salaries paid to young associate attorneys are largely market-driven – if young attorneys aren’t paid somewhat comparable salaries to those in competing jobs, they will go elsewhere. If those $160,000 starting salaries were diminished (or if more potential law students knew how illusory those salaries are), fewer of these top students would go to law school in the first place. </p>
<p>For many years, the starting salary for newly minted Biglaw attorneys in NYC was between $85,000 and $87,000 per year. Then, in (I believe) 1998, things began to change. Suddenly, legal markets in San Francisco, L.A. and Boston began to match NYC salaries. Chicago and Washington, D.C. followed suit. Then, it was actually some of the San Francisco law firms that first began to raise first-year attorney salaries. Reportedly, those firms were losing very junior attorneys to tech companies and financial services firms. Never before had junior attorneys had so many attractive exit opportunities, and the junior attorneys were taking them in droves.</p>
<p>First, starting salaries jumped to $94,000/year, then shortly thereafter to $110,000/year, then to $125,000 per year, and finally, with another incremental step or two, starting salaries landed at $160,000/year. A few firms actually raised starting salaries above that mark, but the market did not follow. Bonuses jumped, too, as the fortunes of law firms grew. In fact, if I remember correctly, between 1986 and 1996 or so, partner profits at Biglaw increased three- or four-fold while associate salaries remained stagnant. At the time, it wasn’t considered that crazy for starting associate salaries to rise.</p>
<p>If a critical mass of disgruntled clients demand changes in either how young associate attorneys are utilized or billed, then perhaps changes will actually be made. Until then, you can expect things to continue on as is.</p>
<p>sally - that was a walk down memory lane. I’ve been a legal recruiter for over 20 years and just when I thought salaries could not go higher, they did. </p>
<p>The wildest time was when law firms figured out a way to pay “stock options” in order to compete with the tech companies. Recruiters weren’t fans of compensation in stock options because it was a challenge to bill on that piece.</p>
<p>And by precisely the same argument, the top MD and PhD students from, say, Harvard or MIT can also easily find high-paying jobs in finance and consulting. In fact, many do. Yet that hasn’t caused the salaries of medical residencies or postdocs to budge even an inch. Like I said before, a Harvard Medical School student can’t just say to a hospital that offers him a residency: “I have an offer from McKinsey that pays 4x what you’re offering, so you need to match that.” The hospital will simply offer the residency to somebody else.</p>
<p>So why are law associate salaries so market-sensitive, but not residencies or postdocs? Is the implication that hospitals and academia don’t really care about retaining top talent? </p>
<p>
</p>
<p>I’m afraid I can’t sympathize with that. Like I said, postdocs pay poorly, as do medical residencies. Yet plenty of people still want to enter academia or medicine.</p>
<p>And if that narrative is true (and I have no reason to doubt it), then that only demonstrates that law associate salaries are not strongly market-driven at all. After all, if associate salaries were in fact market-driven, then while associate salaries might have risen during the dotcom/finance/VC boom to match pay packages offered by tech firms, they should have dropped just as quickly during the resulting crash. Why not? Engineering and CS salaries dropped precipitously during the crash. Why wouldn’t law associate salaries do likewise? </p>
<p>Rather than market forces explaining associate salaries, what we instead seem to have is a non-market ratchet. Associate salaries apparently only rise as the overall market rises; they never seem to decline, even if the overall market declines. What we instead have during a poor economy are more law school graduates who can’t get a biglaw associate job at all as biglaw firms cut back hiring, as what is happening now. But those firms never decide to take advantage of a poor economy by hiring more graduates, but at a lower salary.</p>
<p>Why not? Market forces would dictate that in a buyer’s market such as now, you should be able to buy more of what you want at a lower price. I’m sure that plenty of graduates who today can’t even get a biglaw offer would take one that paid, say, only $120k. That’s surely better than no biglaw offer at all.</p>
<p>Now, surely some of you might reply that such lowball salaries would likely engender internal social strife within the firm, as newly hired associates being paid $120k would inevitably envy those associates luckily hired in years past when the salaries were still $160k. But that speaks to my central point: associate salaries don’t seem to be market-driven as they are socially driven. The non-market ratchet seems to have a social driving force.</p>
<p>The thing is that the top Biglaw firms wouldn’t want the associates who you suggest would settle for lower salaries. The top law firms don’t want the graduates who today can’t get a Biglaw offer, even at a lower price. The law firms want the universally desirable candidates, and they are willing to fight and pay for them. </p>
<p>Believe me, even today, corporate attorneys are almost without exception making less money than their paying clients. It is those clients who are often the employer competition for young associates – not employers of MDs or PhDs. </p>
<p>If the competition for MDs or PhDs from consulting or other companies became stiff enough, perhaps residency salaries would have to rise. Do a material percentage of MDs and PhDs skip residency and join consulting or other companies? In any event, residency is a means to an end. Without the residency, medical training is incomplete and practicing medicine is not possible (correct?). In law, all that is needed to practice is that law degree, however unskilled a recent graduate may be. Isn’t the federal government involved in funding residency programs? Could hospitals survive without the residents? Are there hospitals that don’t utilize residents? (I’ve asked these questions because I don’t know the answers – they are not rhetorical.) I’m just not in a position to explain how or why MDs and PhDs are paid the way they are paid.</p>
<p>Anecdotally, I know that law firms that have (or have threatened to) drop first year salaries, or who don’t increase salaries after the first year at the same rate as similar firms are much discussed by law students and are hurt in the hunt for the law students at the best schools, with the most interesting backgrounds, on the prime journals/moot court/other law school activities and with the highest grades.</p>
<p>I’m afraid I can’t agree. Truly market-driven forces fluctuate up and down along with the vicissitudes of the market. Price ratchets - where prices only rise and never decline - require a non-market, probably sociological, explanation.</p>
<p>
</p>
<p>Now if that’s true, then that’s a truly fascinating hypothesis. After all, as you said yourself, Biglaw associate salaries rose precipitously only over the last 10-15 years. That means that in recent history, biglaw was evidently perfectly willing to ‘settle’ for associates who would accept the lower salaries that biglaw used to pay. Did the practice of biglaw really change that significantly in the last 10-15 years to justify such large increases in salary?</p>
<p>I also continue to return to the question of - why only biglaw specifically? Why not other disciplines? Consulting and finance firms have been heavily poaching topflight engineers (both undergrad and grad) since the 90’s, but that hasn’t seemed to spur engineering firms to raise their salaries in response. Nor have medical residencies and postdocs. Why only biglaw? </p>
<p>
</p>
<p>But that’s not quite true either. If that were the case, then biglaw firms would be actively bidding against each other via higher salaries for the truly most desirable graduates, in the same manner of professional sports teams and free agents. Each biglaw firm would rank each person they want to hire from most to least desirable and then design salary offers accordingly. For example, the guy who graduated #1 from HLS and President of the Harvard Law Review would be garnering the highest salary offers from every biglaw firm, and his HLS classmate who graduated with a far lower ranking (but still high enough for biglaw) would be offered a far lower salary. That’s how a true free market would really work.</p>
<p>But that’s not at all what happens. There is little intra-firm salary differential: every new associate offer from Wachtell is basically going to pay roughly the same salary with only tiny variation. Nor is there much inter-firm salary differential: every salary offer from any of the biglaw firms pays roughly the same salary, again, with only miniscule variation. This is not competition; if anything, it’s collusion. All the biglaw firms have basically informally decided to pay roughly the same salary with little deviation to new associates. And whenever one biglaw firm decides to increase salaries, the others inevitably respond by ‘coincidentally’ increasing salaries by the same amount. In any other market, this would surely be deemed illegal price-fixing. {But since biglaw associates are benefiting from the price-fixing, nobody sues. } </p>
<p>So again, I’m afraid that I cannot accept a market explanation, for there are simply far too many deviations from market behavior. Salaries decline in other labor markets, so why never in biglaw? Salaries are uncoordinated in other labor markets - Microsoft, Google, and Facebook don’t publicly declare that each and every new software developer they hire is going to be paid $80k - so why are they so coordinated in biglaw? </p>
<p>
</p>
<p>Actually, I highly doubt that they would rise. Instead, they would probably just let those MD and PhD graduates move to other fields, and view those who leave for consulting/finance as being not truly ‘dedicated’ to careers in medicine or research. {But somehow those top law graduates who leave for consulting/finance are never painted as not being ‘dedicated’ to the law.} </p>
<p>
</p>
<p>For some (perhaps most) states, this is correct. But there are some states where one can obtain a full medical license after only 1 year of (low-paid) internship. </p>
<p>
</p>
<p>Medicare pays the lion’s share of residency salaries today. Hospitals could supplement those salaries, but they generally don’t (which leads to the depressing implication that hospitals don’t really care about attracting the best residency talent). </p>
<p>
</p>
<p>I think it’s safe to say that many (probably most) teaching hospitals - which comprise the bulk of the top-ranked hospitals in the country - would implode without their residents. It is the residents who provide the bulk of the actual medical care. </p>
<p>
</p>
<p>Hey, welcome to the rest of the world. Engineering/CS salaries dropped precipitously during the dotcom bust. Tech firms - even those such as Microsoft who remained highly profitable during the bust - during didn’t seem to fear being hurt in the hunt for the best engineering graduates. They fearlessly dropped starting salaries. Many of those graduates simply felt lucky to have a job offer at all, even at a reduced salary. During the oil crash of the late 90’s when the price of oil bottomed out at $10 a barrel, oil companies couldn’t seemingly drop starting engineering salaries fast enough. </p>
<p>So why is biglaw so ‘afraid’ of dropping salaries, when other industries apparently have no such fear?</p>
<p>At some point, law firms felt that they were being judged by the quality of their first-year associates. To continue to be considered a top firm, they had to pay what the top firms were paying their first-year associates. Paying those rates were a form of conspicuous consumption. Those firms that paid (even when -if, typically, they lost money by billing for those associates) what the top firms paid were able to maintain their status. Those that weren’t willing to pay those salaries who assumed to have employed less desirable talent.</p>
<p>Looking at it from this viewpoint makes it seem pretty reasonable to me. It’s 20% of corporate clients and some matters. Not all clients and not on all work. It is totally unsurprising to me that some clients would not want first and second year associates working on some complicated, large deals. Many large corporate clients specify who it is they want working on their files at large firms, and they would likely exclude some partners as well. This isn’t unusual.</p>
<p>I’m still waiting for the day that engineering will be characterized by such ‘conspicuous status consumption of employees’ where engineering firms compete to hire the best engineering graduates from the top schools through higher salaries because those firms are being judged by the quality of the first-year engineering graduates they hire.</p>
<p>But I’m not going to hold my breath. Even those guys with Phd’s in engineering from MIT will probably never make $160k a year ever in their lifetime, let alone in their first year. </p>
<p>The same can surely be said for other disciplines. Medical residencies don’t compete for ‘status’ by striving for the most MD graduates from Harvard and Johns Hopkins by bidding up salaries. </p>
<p>The upshot is that first-year biglaw associate salaries are an indisputable windfall that cannot be explained by pure market forces but rather have a strong sociological component (i.e. the competition for ‘status’, which is a sociological construct).</p>
<p>It’s not necessarily that they don’t want junior associates working on the deals, it’s that they don’t want to pay for their work. Surely they don’t want senior associates or partners to do the low-level work, which would cost them a lot more. They want the firms to either internalize the cost of training their junior associates or give the grunt work to paralegals/secretaries. At my old firm, clients were charged thousands of dollars to have first-year associates do nothing more than input changes to documents marked up by senior associates or partners and run blacklines. Clients are starting to push back on these things.</p>
<p>zaprowsdower, clients have been pushing back on these things for a long time. Lists of outside counsel are reviewed annually and discussions take place as to financial arrangements with the ‘relationship’ partner at each particular firm. Different types of work will result in different types of billing. Even at that, when bills come in, there are often adjustments to be made.</p>
<p>Clients have been pushing back (on and off) for decades. They push in lean times, then let up a bit when they’re flush and then push again in lean times. I was an associate with a large firm in the early '80s when several of our clients pushed back then they thought they were picking up the bill for associate training. They negotiated a flat fee for trial preparation up to the point of trial. We had to write off a lot of time.</p>
<p>And despite all of the client pushback, all I know is that biglaw still pays $160k of base salary to its first-year associates. Obviously far fewer people are now being hired as associates, but those who are hired are nevertheless being paid that giant salary. Why? Other industries respond to downturns by cutting starting salaries. Why not biglaw? </p>
<p>What is remarkable is that biglaw firms have responded to the downturn by implementing a bevy of creative cost-cutting solutions such as farming out document review to contractors, implementing productivity-enhancing technology, and forcing out those partners who no longer generate significant business. Which makes it all the more ironic that they categorically refuse to take the most obvious step of all, which is to simply reduce associate starting salaries. They’re perfectly willing to increase starting salaries and did so throughout the last decade, but never decrease it: the very definition of a salary ratchet.</p>
<p>Law firms believe that top salaries attract top people - period. They also know that if they don’t pay at the top of the scale, the associates will leave right when they are at the point of making them some money. There is not a loyalty in the first few years at a “biglaw” firm. If these young people are going to practically live at the office, they may as well be making top dollar. </p>
<p>Lots of firms cut salaries in '09. I have “biglaw” clients that cut starting salaries from $160k to $135 for example. The ones that have not bumped back up to equalize are being raided in the lateral market.</p>